Deriv crypto: February 2023

Tuesday, 28 February 2023

Stellar (XLM): Powering Borderless Financial Systems

Stellar was built for speed and scale to further financial access and inclusion across borders.

Summary

Stellar is a decentralized, open blockchain network that connects global financial infrastructure. As a mature chain, with live use cases easily bridging the digital and fiat worlds, Stellar has more than 4.8 million accounts — and has processed more than 1.5 billion operations since its launch in 2015. On the Stellar payment network, businesses and developers benefit from near-instant settlement and transaction fees of fractions of a cent.

Stellar Network (XLM): Setting a New Global Payment Standard

Each year, billions of U.S. dollars in value are transferred across borders, most notably through personal remittances. Most often, these remittances are sent on a monthly basis as transfers from foreign workers to family members in their home countries. Not only do remittances support millions of families, they also make up a significant portion of the GDP in low- and middle-income countries.

But in today’s financial system, sending these vital remittances is far from simple, and is not a borderless experience. Historically, these payments have suffered from long processing times and high fees — with a typical transaction costing around $200-to-$300, incurring an average retail cost of around 7%-to-8% of the remittance total (and as high as 15% when transferring money to people in developing economies), and taking days to settle. In short, today's system is fraught with slow speeds, cumbersome processes, and high fees that leave millions of people marginalized.

The Stellar network was designed and built to reduce the friction that exists today in a way that both furthers financial inclusion and sets a new global payment standard, so that where you live — and what you have — can no longer prohibit you from participating in the financial system. With the Stellar network, sending payments anywhere in the world can be as easy as sending an email.

This is possible thanks to the speed and scale of the Stellar blockchain. It allows users to exchange between fiat and digital currencies through anchors — that’s the Stellar term for the regulated financial institutions, money service businesses, and financial technology (FinTech) companies that issue 1:1 fiat-backed stablecoins and provide on/off ramps into local payment systems. Anchors help create a world where the existing financial system is connected to, and interoperable with Stellar. This enables users to send and receive money quickly and transparently, while avoiding the fees and latency traditionally associated with cross-border and cross-currency remittances. This is already happening live on the Stellar network. With Stellar anchors such as Saldo, when an unbanked person needs to send foreign currency back home to a family member who needs to use it as local currency, they can do so using an easy application. This is all possible without needing prior knowledge of, or familiarity with, blockchain.

It’s just as impactful for business-to-business (B2B) cross-border payments. For example, Cowrie Integrated Systems, a FinTech company with headquarters in the United Kingdom and offices in Nigeria, provides value-added services over electronic payment networks. Cowrie, knowing too well the friction their business customers encounter sending money to vendors and partners, has designed a payment channel to leverage USDC, one of the world’s leading dollar-collateralized stablecoins, as a bridge currency to help businesses with payments to and from Europe. Working with Tempo, an electronic payments institution based in France and the issuer of EURT — a euro-backed stablecoin also pegged 1:1 to fiat reserves — Stellar is building a bi-directional channel for customers to redeem and trade these stablecoins quickly.

Powered by the Stellar Consensus Protocol (SCP)

How can Stellar manage to do this? In part, due to Stellar’s underlying consensus mechanism, the Stellar Consensus Protocol (SCP). Fast, transparent, and smooth transactions on Stellar are processed and verified by a protocol that allows network participants to reach consensus via voting, rather than by mining. The nodes that uphold and verify the network work in unison to maintain the common distributed ledger, and to verify and add transactions to it. To do that, they rely on SCP, which is neither Proof of Work nor Proof of Stake, but rather uses a system of federated agreement to achieve consensus. Nodes select other nodes that they deem trustworthy, and work with them to craft and ratify a set of valid transactions to change the state of the ledger. Those in turn identify other reliable nodes, ultimately reaching network consensus through a quorum.

Another point of distinction is that the SCP provides users with a decentralized and efficient network. Typical mining processes are associated with large financial costs and high energy requirements, some relying on servers to the point of unsustainability. Transactions verified via the SCP are processed quickly — in three-to-five seconds on average, with the possibility of thousands of transactions occurring simultaneously — making the Stellar network a fast, sustainable, and convenient payment solution for cross-border transactions.

Enhanced by Stellar Network’s Built-In Features

SCP, paired with Stellar’s application programming interface (API) Horizon and the growing tools and products available to the ecosystem, creates an environment where it’s easy for businesses and developers to build on the network and leverage its most compelling features, like:

Speed: Transactions on the Stellar blockchain are confirmed in three-to-five seconds.

Cost: The cost per transaction (regardless of the size of the transaction) is negligible, and in 2021 averaged a little more than 0.00001 lumens, or XLM (Stellar network’s cryptocurrency). Fees, which are set by the protocol, are burned because they exist only to deter bad actors.
Asset issuance: Stellar’s supporting code is reliable, vetted, and fast, and tokens can be issued in just a few lines of code.
Decentralized exchange: Stellar has common built-in order books called the Stellar Decentralized Exchange, so every token is exchangeable, and the Stellar protocol itself connects buyers and sellers.
Compliant: Stellar is a leader in compliance, with built-in features that allow unified Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) processes, asset control at the protocol level, and issuer-enforced finality.
Developer tools: Stellar’s open-source developer resources provide comprehensive documentation, software development kits (SDKs), and tutorials.
Sustainable: Because of Stellar’s consensus mechanism, the network costs as much as running a server and, unlike mining, resource requirements are low.
A native coin: Stellar created a native network currency lumens, or XLM, as a non-discriminatory solution to prevent spam on the network. Anyone who uses Stellar is required to keep a small amount of Stellar lumens in their account, and everyone has equal access to it. The XLM coin requirement is low enough to keep Stellar accessible, but deters frivolous and malicious actors from engaging with the Stellar network at a rampant scale.

Stellar Blockchain: An Interoperable, Connected Financial World

Stellar strives to set a new global payments standard. To do that, it was built for interoperability, connecting the existing financial system and payment rails with new digital ones so that value can flow seamlessly across borders.

It’s been decades since the current financial system was modernized. Blockchain technology is challenging us to think about money and value in a new way, presenting the opportunity to make it more effective and efficient. In much the same way that the internet democratized access to information, blockchain technology democratizes access to the financial system.

Sunday, 19 February 2023

Finding the Right Asset Balance for Your Investing Goals

You can customize your portfolio of assets to reflect your unique goals, preferences, and risk tolerance at any given stage in your life.

Gemini-Finding the Right Asset Balance for Your Goals -100

Summary

All investments come with different risks and rewards. One way of trying to mitigate the investment risks inherent in any industry or sector is to have a diversified portfolio. Professional portfolio managers diversify, and so should you. Regardless of your specific situation and goals, a well-balanced portfolio could include a variety of assets ranging from stocks and bonds to commodities — and maybe even a crypto portfolio. So how do you find a mix of assets and financial instruments that’s right for you?

Why Asset Balance Is Critical

The global asset market — from stocks to crypto to gold to bonds — offers an incredible variety of assets to choose from when it comes to investing. Every single asset represents both an investment in the asset itself and an expectation of the market forces that will define its future. Both quantitatively and qualitatively, each asset represents a complex web of possibilities that correspond to its price in the market. Thus, it is optimal to diversify the risk you hold across asset classes and markets. The key to achieving this is asset balance in your portfolio of financial instruments.

A Balanced Portfolio Begins With Asset Allocation

A well-balanced portfolio is one key to successful long-term investing regardless of whether you have lots of capital in financial markets, or if the extent of your investments is simply your retirement plan. In all cases, building a diversified portfolio is the act of deciding what type and quantity of assets — stocks, bonds, exchange-traded funds (ETFs), crypto, or other assets — you want to hold. And this, in turn, is informed by your goals, resources, and tolerance for risk. Once you understand these factors, you’re ready to choose a blend of assets that reflects your preferences, degree of comfort with risk, and lifestyle.

For example, say you’re just out of college and you’ve landed a job with a firm that offers a 401(k) plan. You might want to take advantage of this investment vehicle to help save for your future, but you’re nervous because you’ve never invested before. In addition, while you might not know much about investing, you do know that you’ve never been one to take many chances. Based on these factors, you might opt for a more conservative portfolio mix that includes more bonds and Treasury bills, which are traditionally considered safer or less volatile than assets such as stocks or other alternatives. But, regardless of your financial goals or tolerance for risk, it often isn’t enough just to allocate your money to investments and leave them untouched (although for some, that may very well suffice).

Rebalancing Your Diversified Portfolio Is a Continuous Process

Maintaining a balanced portfolio is an ongoing effort rather than a one-time action. Over time, a once-balanced portfolio can skew toward particular assets due to various market forces, which may unbalance your portfolio. Similarly, you may wish to update your holdings over time to reflect the evolution of your financial needs, preferences, and tolerance for risk. Rebalancing refers to the readjustment of your investment portfolio holdings by buying and selling certain assets to attain a desirable balance once again.

Most financial services professionals recommend rebalancing your portfolio on a bi-annual basis. Done too often, you may over-accommodate short-term market fluctuations that don’t really reflect your long-term earnings potential, and in turn, you could make hasty investment decisions. Choosing a predetermined time to regularly check your portfolio and reallocate assets according to medium-term movement is the most common portfolio rebalancing strategy. Another option is choosing to rebalance when your portfolio or certain assets achieve certain quantifiable metrics.

Asset Allocation Is Based on Your Age and Risk Tolerance

A widely acknowledged investment strategy is to tailor your tolerance for risk to your age. Generally, the younger you are, the more you might feel comfortable taking greater risks — and potentially reaping greater rewards — because you may not need to access the money you have invested for years to come, and may have time to recoup losses from risky investments over your lifetime. As you get older, your risk tolerance may go down as you seek investments that provide steady income and look to preserve the capital you’ve accumulated throughout your lifetime.

Setting a strategy is a good way to make sure you’re rebalancing your diversified portfolio based on a specific plan, rather than on emotions or short-term market fluctuations.

Should Your Asset Allocations Include a Crypto Portfolio Component?

As a new asset class, digital assets and cryptocurrencies will take time to integrate fully with the global economy — but they also have a number of advantages over traditional assets. Many cryptocurrencies are not correlated with stocks and bonds, which means that they can help diversify your portfolio and hedge against risk in traditional markets. They also have the potential to bring in remarkable returns, although of course this comes with increased risk and the resulting potential for losses. Ultimately, adding a crypto portfolio component for asset balance is a personal decision based on risk tolerance.

Cryptocurrency Brings New Meaning to Managing Risk

Summary

It’s true that investing in cryptocurrencies can present different risks than investing in traditional securities, but what’s usually misunderstood is that you simply cannot equate the investment risks of legacy assets with those of crypto assets. The nature of these asset classes is entirely different, and should therefore be evaluated in the proper context.

A Brief Look at Speculative Securities

When a security is deemed “speculative,” there is an inherent risk that it may lose interest or principal or both — and many investors rightly tend to shy away from high-risk securities. But, the outcome of any speculative investment is hard to anticipate and may just as easily lead to gain as it does to loss.

For example, high-yield bonds, also called junk bonds, are among the riskiest assets because the companies that issue them generally have very low credit ratings, so these securities have more potential of defaulting than the better-rated corporate-bond issuers. In the late-1980s — the heyday of junk bonds — these debt instruments were called “speculative-grade” or “below-investment-grade” bonds. In addition to their low credit ratings, many issuers of high-yield bonds were in various stages of bankruptcy and it was unclear which companies would make it and which would not. If you invested in a firm that successfully emerged from bankruptcy, you might have made a fortune. However, that would have been hard to do and many investors ended up losing their capital. The uncertainty of investing in a junk bond, even with the use of traditional investment analytical tools — like company history, financials, performance metrics, and market trends — is what made them speculative.

The Evolving Risks of Crypto

The cryptocurrency market is speculative, too, and the returns there can also be quite high, as evidenced by bitcoin’s astronomical ascent from $10,000 to $20,000 USD in less than two weeks in December 2017. And, like the junk-bond issuers of the ‘80s, no one really knows which digital assets will come out on top in the long run. But cryptocurrency trading risks are very different from the ways in which high-yield bonds are risky. Still, crypto risk management is important.

With crypto, so much of the asset class is new and evolving at breakneck speed. We cannot even decide what cryptocurrency is: the IRS views crypto as property and taxes it as capital gains and the SEC believes it’s a security that should be subject to the SEC’s regulations. So, when the very essence of a thing is in question from a regulatory perspective, then it’s easy to default to calling it “risky.” Accordingly, it makes sense to approach cryptocurrency with a degree of caution, as well as excitement.

Speculative Risk-Taking Is a Conscious Choice

Investing is as much an art as a science, and even professional investors are not immune to surprises in the market. One thing investing should not be, however, is a gamble. It’s important to do your due diligence, educate yourself about the assets that interest you, and familiarize yourself with known risks and the crypto exchanges on which you can trade.

Here are some risk factors to consider regarding investing in crypto and creating a crypto risk management process:

Market volatility: A digital asset’s price can run the gamut of extreme highs and lows in a single day. Moreover, this volatility doesn’t seem to follow a pattern. In this environment, it’s wise to watch the market carefully when investing. It’s also important to have a plan. Decide how much you want to spend on crypto based on your budget, and plan it out ahead of time.

Market regulation: Depending on who you talk to, the fact that the crypto market is not regulated by any one entity may or may not be an investment risk factor. Some believe that the regulation itself makes crypto risky, while others feel that the advent of more regulations could stifle innovation in the sector. Some risks that could arise because of evolving regulation include consumer protection, the absence of a clear legal venue for adjudicating disputes, and a general lack of clarity about precisely what investors and exchanges can and cannot do. But aside from those who don’t want any controls on crypto at all, most market participants believe that, as with any industry, cryptocurrency needs some standardized regulatory controls.

Perhaps the more salient issue with respect to building an effective crypto risk-management strategy is about not imposing traditional financial language on a new asset class. While crypto can arguably still be characterized as speculative, there is growing consensus that the underlying technology, networks, and crypto assets themselves do indeed have value. How to properly define and quantify that value is a work in progress that will ultimately determine investor’s perception of the risk within the asset class.